Working Paper: CEPR ID: DP9839
Authors: Monika Mrzova; J Peter Neary
Abstract: We show that relaxing the assumption of CES preferences in monopolistic competition has surprising implications when trade is restricted. Integrated and segmented markets behave very differently, the latter typically implying a form of reciprocal dumping. Globalization and lower trade costs have very different effects: the former reduces spending on all existing varieties, the latter switches spending from home to imported varieties; in the plausible case where demands are less convex than CES, globalization raises firm output whereas lower trade costs reduce it. Finally, calibrating gains from trade is harder. Many more parameters need to be calibrated than in the CES case, while import demand elasticities are likely to overestimate the true elasticities, and so underestimate the gains from trade.
Keywords: Additively separable preferences; CES preferences; Iceberg trade costs; Quantifying gains from trade; Super and subconcavity of utility; Super and subconvexity of demand
JEL Codes: F12; F15; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs (F19) | demand structure (D49) |
| demand structure (D49) | welfare (I38) |
| demand structure (D49) | firm output (D21) |
| globalization (F60) | firm output (D21) |
| lower trade costs (F19) | firm output (D21) |
| relaxing the CES preferences (D11) | integrated markets behavior (G40) |
| relaxing the CES preferences (D11) | segmented markets behavior (D16) |
| segmented markets (J42) | reciprocal dumping (F18) |
| integrated markets (F02) | no reciprocal dumping (F18) |
| import demand elasticities (D12) | underestimation of gains from trade (F14) |